Most financing advice assumes one credit limit. Build revenue, keep the books clean, maintain a relationship with a bank, and the amount you can borrow goes up.
A contractor has two limits, and they move independently. A bank decides how much you can borrow. A surety decides how much work you are allowed to carry at all. For a contractor bidding bonded work, the second one is frequently the binding constraint on the size of the business, and it is the one nobody manages deliberately.
Two Readers, Two Documents
What each one is actually asking
- A lender asks: if this business stops performing, what do we recover? That is a balance sheet question, answered with assets, receivables, working capital and usually a personal guarantee.
- A surety asks: if this contractor takes this job, will they finish it? That is a performance question, answered with a work-in-progress schedule, working capital, equity, and a judgement about the people.
This is why a good year can move one limit and not the other. Profit that was distributed out of the business improves neither equity nor working capital, so a surety sees a company no better placed to absorb a problem than it was last year. The bank may be perfectly happy. The capacity does not move.
What Actually Decides Bonding Capacity
Capacity usually comes as two numbers: a single job limit and an aggregate limit across all bonded work. Underwriting weights three things heavily.
- The work-in-progress schedule. The most important document you produce, and the one most contractors cannot produce on demand. It shows whether reported profit is real and whether billing is keeping pace with the work.
- Working capital. Current assets against current liabilities, with a sceptical eye on how much of the current assets are actually current. Retainage buried inside receivables gets noticed.
- Equity. What has been retained in the business rather than distributed.
Underbillings deserve specific attention here, because they hurt more than their size suggests. To an underwriter, a large underbilling reads as one of two things: billing that has fallen behind production, or a job that is quietly losing money. Neither reading helps you, and both are avoidable by billing to production.
Matching the Instrument to the Problem
On the borrowing side, the recurring mistake is not the rate. It is using an instrument whose shape does not match the need.
- The gap between spending and collecting is recurring and cyclical, so it wants a revolving facility whose balance rises and falls with the cycle.
- Equipment is an asset with a life, so it wants financing whose term matches that life. This interacts with depreciation planning, covered in contractor equipment depreciation.
- Mobilisation on a large job is a defined, temporary need with a known end date, and is worth arranging as such rather than absorbing into a general facility.
The warning sign worth watching. A line of credit that used to clear between jobs and now carries a permanent balance has stopped being a facility and become working capital. That is not necessarily wrong, but it should be a decision rather than something you notice a year late. See why profitable contractors run out of cash.
Arrange It Before You Need It
Both limits are far easier to move from a position of strength, and the timing is not subtle. A facility arranged off a good year and a clean work-in-progress schedule is a different conversation, on different terms, from the same facility requested during a squeeze.
The same is true of capacity. The moment a general contractor asks you to bond a job you want is the wrong moment to discover that your reporting cannot support the request. That request usually arrives with a deadline attached, and a surety will want three years of financials and a current schedule that takes weeks to construct if it does not already exist.
The Agent Relationship Is Part of the Capacity
Bonding runs through an agent who presents your package to underwriters. That relationship is an asset and it responds to how easy you are to represent.
An agent handed a clean, current, well-prepared package can go to market with it immediately. An agent who has to chase you for a schedule, then explain the underbillings, is spending their own credibility on your paperwork. When capacity is tight and an underwriter has room for one more contractor, the one who presents well is the one who gets put forward. That is not administrative tidiness, it is how the relationship compounds.
The reporting behind all of this is described on WIP reporting and bonding capacity.
Frequently Asked Questions
What is bonding capacity and how is it determined?
Bonding capacity is the total value of bonded work a surety will allow you to carry, usually expressed as a single job limit and an aggregate limit. It is underwritten primarily on three things: your work-in-progress schedule, your working capital, and your equity. The WIP schedule matters most because it shows whether reported profit is real and whether billing is keeping pace with production. Character, experience and continuity of the business also weigh on it, which is why a surety relationship behaves less like a loan application and more like an ongoing relationship.
Why did my bonding capacity not increase after a profitable year?
Most often because the underwriter is reading a stale or unflattering work-in-progress schedule rather than because the year was not good. Significant underbillings weaken the picture, since they read as either billing falling behind production or a job losing money. Working capital that has been consumed by growth also caps capacity even where profit was strong. A profitable year presented on a current, well-prepared schedule moves capacity in a way the same year presented late or incompletely does not.
Should a contractor use a line of credit or a term loan?
They solve different problems. A revolving line of credit is the right instrument for the gap between spending on a job and being paid for it, because the balance rises and falls with the cycle. A term loan suits an asset with a life, such as equipment, where the repayment period can be matched to the useful life. The common mistake is financing recurring working capital needs with instruments that do not revolve, which leaves a permanent balance that never clears and quietly becomes the most expensive part of the business.
What do lenders look for from a construction company?
Accrual financial statements rather than cash basis, because cash basis tells a lender very little about a business whose value sits in open contracts. Beyond that: a current work-in-progress schedule, receivables and retainage aged separately, backlog, and a clear picture of working capital. Personal guarantees are common. The practical point is that everything on that list is produced by the same job cost data, so a contractor who keeps it for one reader has it ready for the other.
How do I improve my bonding capacity?
Improve the three things underwriting actually reads. Keep the work-in-progress schedule current and prepared the way an underwriter expects to see it, so nothing has to be explained. Close underbillings, because they weaken the picture disproportionately to their size. Retain earnings in the business rather than distributing everything, because equity and working capital are direct inputs. Then present it through an agent who has a clean package to work with, since the agent who can present well is the one who puts your name forward when capacity is tight.
Two Limits, Two Readers, One Set of Numbers
A bank decides how much you can borrow. A surety decides how much work you are allowed to carry. They read different documents and weight them differently, but both are reading numbers your books produce. A contractor with a clean, current work-in-progress schedule and real working capital is negotiating with both from strength. A contractor without one is explaining.
About the Author
Tom Woolley, MBA
Tom Woolley is a fractional CFO who spent six years running job costing and logistics in construction before founding Today CFO. He works with commercial subcontractors and small general contractors on the reporting a GC and a surety actually read.
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